lecture 21 - Business Finance Lecture 21 Review of the...

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112 Business Finance Lecture 21 Review of the Previous Lecture Bond Indenture Terms of a bonds Security Seniority Call provision Repayment Protective covenants Bond Ratings Topics under Discussion Different Type of bonds Government Bonds Zero Coupon Bonds Floating rate Bonds Other Types Inflation and Returns The Fisher Effect Determinants of Bond Yields Different Types of Bonds Government Bonds Zero Coupon Bonds Floating-Rate Bonds Other Bonds Government Bonds When the government wishes to borrow money for more than one year, it sells what are known as treasury notes and bonds (mostly in the form of ordinary coupon bond) to the public. Govt. treasury issues have no default risk These issues are exempted from income taxes Zero Coupon Bonds A bond that pays no coupon at all and are offered at a price that is much lower than its stated value. Suppose N company issues a $1000 face value, 5 year zero coupon bond.
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113 Initial price is set at $497, yielding 15% to maturity Total interest paid over the life of the bond is $1000 – 497 = $503 Zero Coupon Bonds For tax purposes, the issuer of a zero coupon bond deducts interest every year even though no interest is actually paid. Because of the tax break, the yields are lower than the yields on taxable bonds
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This note was uploaded on 08/04/2011 for the course ACCT 501 taught by Professor Na during the Spring '11 term at Virtual University of Pakistan.

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lecture 21 - Business Finance Lecture 21 Review of the...

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